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Pre-Budget Report 2009: an overview

The Chancellor, Alistair Darling introduced a pre-election pre-Budget Report to the Commons that would, he said, “build a strong economy and a fair society”.

He went on to say that he wished to take steps to “support the economy, businesses and households” in order to provide a “platform for growth and opportunity”.

Mr Darling faces the twin dilemmas of a soaring public finance deficit and a recession-driven drop in government income.

To cut spending too severely runs the risk of choking off a recovery that has been bolstered by government investment in public services and is still tentative. To introduce significant tax rises too soon poses a similar danger.

Before getting into the detail of his plans, Mr Darling conceded that the recession has had a deeper impact on the economy than he previously anticipated.

The economy, he said, will contract by 4.75 per cent this year, not 3.5 per cent, returning to growth by the fourth quarter. But he stuck to his forecast for growth rates of between 1 per cent and 1.5 per cent for next year and of 3.5 per cent in 2011/12.

Consumer inflation is set to rise to 3 per cent early next year before falling back to 1.5 per cent by the end of 2010.

Public finances, too, have suffered a little more than was predicted back in the April Budget. Government borrowing is forecast to reach £178 billion this year, £3 billion up on Mr Darling’s April estimate, and £176 billion in 2010 before falling further to £140 billion in 2011, to £96 billion in 2013 and to £82 billion in 2014.

The government has committed itself to halving the budget deficit in four years.

This will inevitably entail both spending cuts and tax rises, and Mr Darling duly addressed both, although much of the discomfort has been deferred.

The most eye-catching announcements were plans to raise NICs by 0.5 per cent in April 2011 – that’s in addition to the 0.5 per cent already pencilled in – and to impose a 1 per cent cap for two years on public sector pay rises also in 2011.

There are changes to income tax as well: the point at which taxpayers are charged the higher, 40 per cent rate of income tax is to be frozen in 2012/13 at its 2011/12 level, which means more people will be liable.

Bankers’ bonuses are to see a 50 per cent levy on any payment over £25,000, the money generated going to tackling youth unemployment.

The rate at which public spending grows is set to slow each year between 2011 and 2015, but Mr Darling did not detail exactly where the axe will fall since the comprehensive spending review will not now be held until after the general election.

Frontline services, however, such as schools and the NHS, will be protected, he said.

Small businesses received some welcome news. The planned increase in the small companies’ rate of corporation tax, from 21 per cent to 22 per cent, has been put back another year.

VAT returns to a standard rate of 17.5 per cent (though no higher as some feared).

The business rates relief scheme for empty properties, which was introduced in the 2008 pre-Budget Report, has been extended. For 2010/11, empty properties with a rateable value below £18,000 will not be liable to business rates.

Businesses that find themselves struggling to pay VAT, corporation tax, PAYE, income tax and NICs will still be able to make use of HMRC’s Business Payment Support Service. This means that firms facing temporary financial problems can negotiate spreading the payment of tax bills over a period of time they can afford.

The Chancellor also proposed a package of measures to improve the levels of funding available to cash-starved firms: the Enterprise Finance Guarantee is to get a further 12 months' lease of life and there are plans to establish a special growth capital fund for SMEs.

The issue is: are the proposed tax rises enough to protect spending as well as to cut the budget deficit? Time will tell whether Mr Darling’s 2009 pre-Budget Report speeds the slow economic recovery.